D&O protection gap grows as rates soar

The government is in talks with insurers about the rising cost of D&O premiums, it has emerged. D&O insurance has risen by as much as 90% over the past year, following corporate governance and COVID-19 concerns.

This has been exacerbated by impending regulatory changes which could make directors personally responsible for financial statements, the Financial Times reported.

The government is taking a more direct interest in the problem amid fears that small businesses are struggling to meet the cost.

Institute of Directors director general Jonathan Geldart told business secretary Kwasi Kwarteng the cost of D&O insurance was ”having a profound effect on some smaller businesses” and the increases ”put yet more pressure on businesses and entrepreneurs at a time when, for many, cash flow remains fragile”.

According to the Financial Times, the government replied that it was also concerned about the cost, and was in “continual dialogue with the insurance sector regarding its response to this unprecedented situation”.

Corporate bankruptcies will be a strong driver of D&O risk in 2021 in the UK and Germany, according to law firm Clyde & Co

While legislative measures such as the UK’s Corporate Insolvency and Governance Act 2020 have offered some protection to directors of companies facing financial difficulties, insolvency claims will be a strong driver of D&O risk in 2021, it predicts.

Meanwhile, there is a growing protection gap for SMEs. Law firm BLM has launched a new D&O Tracker which reveals that UK SMEs are increasingly in the firing line for large fines from regulatory bodies.

The data shows that UK SMEs received over £100m in fines from UK regulatory bodies over the last four years.

BLM professional indemnity partner Alex Traill said: “Whilst D&O cover is popular with larger corporates there is a real coverage and perception gap in the SME market. Either directors and officers are genuinely unaware of the need for cover or they think they’ll never need it.

“There have been instances where SMEs have suffered a regulatory fine where they haven’t got sufficient funds or insurance to cover those fines. What’s more, we’ve seen examples of custodial sentences being handed down for various breaches committed by companies of different sizes, so the risk and potential impact on company owners and directors as individuals is very real.”

The D&O tracker also highlights the increasing trend towards cyber-related fines, with large fines - in excess of £50,000 - being handed down by the Information Commissioner’s Office. 

The situation is likely to be exacerbated by the escalating cost of coverage and contraction in available capacity. Last month, sister publication Insurance Times reported that escalating premiums for D&O insurance could see firms refuse to purchase or reduce this cover, leaving senior professionals personally on the hook for any arising claims.

“If companies are unable or unwilling to purchase policies to protect directors, then those directors - if willing to sit on the board still - could face potentially ruinous legal costs to defend themselves against, quite often meritless, claims”, James Wickes, partner at law firm RPC said.